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A company that buys equipment or property has to put the asset and associated financial liability on its balance sheet and then take interest and depreciation charges. A similar company that leases the identical equipment/property may face annual rental charges only.
On this latter “operating lease” basis, leverage will look much lighter. Largely for that reason, operating leases have become increasingly popular: in 2005.
The proposals also envisage differing treatment, in terms of expense recognition, for property-type leases (a straight-line lease expense in the income statement) and equipment-type leases (amortisation of the asset would be reported separately from interest on the lease liability).
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